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Legislative Memo

BILL:

S.6409-A/A.9009-A, Part R (Executive Budget)

SUBJECT:

Small Business Income Tax Rate Reduction

DATE:

March 7, 2015

The Business Council supports the small business income tax rate reduction proposed in the Executive Budget. This bill will provide small business tax relief under both the corporate franchise tax and the personal income tax.

As proposed, these two components would provide about $300 million in annual tax relief to small business.

We support this approach, and agree with its basic structure. However, we recommend increasing the income cap under both proposals, to at least $500,000.

Specifically, the Executive Budget proposal would:

reduce the entire net income based tax rate for small business under the Article 9-A corporate franchise tax from 6.5% to 4%, effective for the 2017 tax year. This rate reduction applies to incorporated small businesses with less than 100 employees and less than $1 million in capital, and with a business income base under $290,000. The rate reduction phases out for taxpayers with business income base under $390,000.

expand the business income exclusion under the personal income tax from 5% to 15%, and makes this exclusion available for members, partners, and shareholders of LLCs, partnerships and sub-S corps in addition to sole proprietors. It is applicable for taxpayers with net business or farm income under $250,000 and where the income is derived from an entity with gross business income under $1.5 million (or $250,000 for a farm business.)

This year’s focus on small business tax reform is a logical next step in New York’s business tax reform efforts. In 2014, the legislature adopted a significant restructuring of the corporate franchise tax, updating that statute and folding the bank tax into the CFT. In 2015, the legislature approved legislation bringing the New York City general corporation tax into general conformance with the state reforms. Together, these actions modernized the state’s principle business taxes, reduced compliance and auditing challenges for business and state/city tax agencies alike, and produced a $600 million tax reduction, once the reforms were fully applicable in the 2016 tax year.

However, these amendments and the resulting tax savings mostly affected public traded corporations.

In contrast, most small business are set up as pass-through entities such as LLCs, partnerships or subchapter S corporations that pay the bulk of their business income tax under the personal income tax, not the corporate franchise tax. The Executive Budget will provide income tax relief to these businesses.

We belief this proposal deserves the support of the Senate and Assembly, and recommend that the Executive Budget bill be amended to apply to a broader universe of small business taxpayers.